By Richard L. Kesner, President
The CommonWealth Group
The market’s volatility continued for the first month of the fourth quarter. The abundance or overabundance of information has shown that most investors still have knee jerk reactions to news. We have come to realize that most investors do not understand the news they do receive.
Oracle is an example of the above reaction. Oracle’s stock got clobbered when management announced that “database sales would only growa healthy 15% to 25% in each of the next three quarters.
With all of the information available to investors, it is important to sift through the “noise” and get to the bottom line. The money managers we recommend to clients do this type of research to avoid the noise to get to the bottom line. Are they always right? I think the best comment would to be that they never assume they are right. They double and triple check what analysts are saying, what management is saying, and what the competition is saying. Then they can make an informed decision on the purchase or sale of a stock.
Intel is another example. “Intel preannounced that September quarter revenues would only grow 3% to 5% sequentially from the June quarter.” The announcement also stated they were increasing their guidance for investment income by $100 million and declined to reduce earnings guidance. Right after the announcement we saw comments by analysts about Intel’s earnings disappointment. Where was the disappointment? Was it really a surprise when Intel’s earnings were good?
Dell Computer is seeing a healthy increase in its European business. In addition, the company has been gaining market share from Apple Computer in the back-to-school market. Apple announced an earnings shortfall for the fall quarter. Dell’s stock went down 8%.
If a stock drops and management knew in advance that there was bad news on the horizon, and does not disclose that news, it is subject to a lawsuit. Dell made a very small earnings pre-announcement, stating that “earnings for the October quarter are on target, but for the January quarter they might fall short one cent if the current minor weakness in Europe continues.” The market responded by whacking Dell’s stock about another 10%.
Where does all of this misinformation and noise come from? Today most of the information comes from individuals who put their two cents worth into the picture. A University of California, Berkeley study found that “fueled by ever-falling prices for digital storage, increasing computer power and the rise of the Net, the total amount of unique information generated worldwide each year is about 1.5 exabytes. One exabyte is 1 followed by 18 zeroes. Stored on floppy disks, the information would stack 2 million miles high.”
If we divided this yearly information glut among the entire population of the world it would require that each be given the equivalent of a library of 250 books. One hundred years ago the average person created a very small amount of information in his life, a stack of letters, or an album of photographs. Now, office workers alone are responsible for writing more than 80% of all original paper documents. The quantity of e-mail sent by individuals (mostly poor jokes) is 500 times larger than the entire collection of Web pages.
Information overload can be a serious threat to your investments. Using professionals to sift through the information is a major way to avoid emotional turmoil with your investments.
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